L'intérêt négatif - Un test de légitimité pour la BCE (ENG)
If we still needed just one final proof that the eurozone has gone into deflation, in other words into a situation of falling prices and more or less zero growth, we now have it. On 5 June, the ECB may cut the interest rate on its deposits so much that they become negative. This rate, which rewards private banks’ deposits with the ECB, is currently 0%. A negative rate on deposits would mean making private banks pay to place their liquidity in the ECB. The very idea suggests that the ECB has been providing so much protection to the banking system that the price of this guarantee should be higher than the return on money. Which implies that the ECB is indirectly encouraging the banks to lend their excess liquidity to States or private debtors. So a drop in the cost of money seems to be substituting for the weakness of money circulation in the economy.
A euro is no longer worth a euro
Negative interest rates are not some kind of financial witchcraft. Of course, it is worrying that the ECB is penalising deposits by private banks while at the same time issuing banknotes that are also part of its liabilities but which conserve their face value. “Paper” money and fiduciary money would therefore no longer have the same value. Not all euros would still be fungible. So negative interest rates could only be a temporary situation, as interest is the “price of time” applied to money, and there is no such thing as negative time.
Several European countries (such as Switzerland and Sweden) have already used this technique to prevent the appreciation of their currencies. Certain eurozone states have even already taken out short-term loans on negative terms, during the sovereign debt tensions of recent years. And we are in any case already in negative interest territory, as the real interest rates, i.e. after deducting expected inflation, are negative. Nonetheless, there is a difference – negative real interest rates do not drain off capital (€1,000 are still €1,000, even if the interest rate is not high enough to cover inflation), whereas negative nominal interest rates dilapidate capital (a deposit of €1,000 becomes €990, including interest).
Why negative interest rates?
This reality stems from financial repression, a recessionary situation and the fight against deleveraging. Financial repression is a context marked by rates that are kept artificially low in order to ease the burden of the public debt. Recession also puts interest rates under pressure – as investment needs are exceptionally weak, the quantity of money borrowed plunges, thus reducing its price, i.e. the interest rate. If they were transposed into the economy as a whole, negative interest rates would act to stimulate borrowing and consumption and discourage savings, as money deposits would be penalised. The ECB probably also wants to ensure that lines of credit opened for private banks do not end up back on its own balance sheet, in the form of deposits.
So the economy is stagnant and its money circuits have seized up. It is stuck in a “liquidity trap” that is typical of periods when consumption and investment do not respond to the money supply and minuscule interest rates. In fact, that is why negative interest rates are more of a signal than a remedy – the transmission channels for monetary policy are broken. And we should be under no illusions. In themselves, negative interest rates will not relaunch even the tiniest fragment of the real economy. The ECB is giving this measure a try, but after that, it will inevitably find itself facing the need to refinance public debts or bank loans.
Drawbacks for states and banks
Negative interest rates have some disadvantages too. State indebtedness is fostered by weak or negative rates. The rates no longer serve to discipline States, which can consolidate their debts at lower cost. The rates also prompt investors to take additional risks, helping to form asset bubbles.
Financial institutions that live by transforming maturities (banks and life insurance companies) are, for their part, faced with an inversion of the value creation chain. Banks, for instance, traditionally have placements that are longer-term than their liabilities, in other words than the deposits that are entrusted to them. At first, a drop in interest rates has a favourable effect on their balance sheets, due to unrealised gains, but this advantage evaporates over time. In this case, if interest rates go too low, profitability will decline. The financial institutions are, in fact, torn between too low yields from their assets and their own customers’ demand for remuneration. Moreover, instead of benefiting from a maturity transformation margin on deposits in relation to their placements, the banks have to absorb operating costs that exceed this margin. This pressure is all the more brutal if the drop in interest rates is strong.
The defeat of monetary policy
In conclusion, negative interest rates are taking us into a new world that signals the surrender of the ECB’s monetary policy. This institution set out to transpose deutschmark-type management to the euro. But the euro has become an inherently recessionary and deflationary currency, to the point where the hoarding of it must be discouraged.
Today, austerity programmes and monetary asceticism have brought us to the edge of a deflationary abyss, which is the worst seize-up scenario for an economy. It can only be hoped that we will not fall into a Japanese-style trap consisting of a strong currency accompanied by a lack of inflation and snail’s pace growth. If that happens, questions will have to be asked in hindsight about the suitability of policies based on budget restraint and tight money management. After all, a Japanese-type scenario cannot be blamed on outrageous misfortune. It is the result of a chosen policy.
Finally, it is not difficult to get into negative interest rate territory. But it is difficult to get back out again. At the moment, we run the risk of a severe economic contraction. The ECB ought to have taken the full measure of that danger right from the start of the crisis, and it should have cast off German tutelage, which is maintained by the fear of a hypothetical inflation. Rather than dreading inflation, we should be creating some. And we must see to it that what little growth we have is not stifled by austerity programmes.
